Site Search Navigation

Site Navigation

Site Mobile Navigation

Social Largess Speeds Rise in Oil Prices

By Clifford Krauss April 28, 2011 6:14 pmApril 28, 2011 6:14 pm

Agence France-Presse — Getty ImagesA food market in Dubai.

There’s no mystery in why all the unrest in North Africa and the Middle East would cause oil and gasoline prices to soar. Libya’s high quality sweet crude is almost off the market entirely, and it’s anyone’s guess when the next oil producer is going to suffer a revolution that could cripple production.

But PFC Energy, a leading strategy advisory firm, has come up with another reason why political developments in several OPEC countries are driving prices higher, despite Saudi Arabia’s assurances that the kingdom will boost production to make up for any gaps. In a report this week, PFC calculated that populist spending policies are contributing to the need for higher revenues from oil sales.

“Saudi Arabia and the U.A.E. (i.e. Abu Dhabi) are now seeing a rising share of total expenditures accounted for by higher government salaries, subsidies and housing allowances, and payoffs to the religious establishment,” a private report offered to the firm’s clients says. “Today’s high oil prices facilitate the financing of the expansive spending packages that [Saudi] King Abdullah has recently announced to prevent outbreaks of popular unrest within the country.”

This is not happy news for anybody spending $4 a gallon at the pump these days. The autocratic regimes of the region relieve social pressures by offering their people all kinds of goodies, including subsidies at the pump. This kind of spending tends to undercut productivity, raise local oil and gas consumption and leave less oil for export — and it can be addictive for the governments and their subjects alike. And in the end, while it may bring some social peace, it increases oil and gasoline prices worldwide.
To be sure, the increase in oil prices has brought more economic stability to some OPEC governments, including those of Ecuador and Venezuela. But in the end, the report noted, “OPEC members have required steadily increasing threshold prices over the course of the past decade.”

The kicker to the report is particularly worrisome: “Prices below $90 a barrel would likely now be sufficient to elicit joint OPEC action to implement production cuts.” In other words, prices at the pump are not going to get much lower, and they could go even higher.

What's Next

About

How are climate change, scarcer resources, population growth and other challenges reshaping society? From science to business to politics to living, our reporters track the high-stakes pursuit of a greener globe in a dialogue with experts and readers.